leverage

The term leverage is used in a number of different contexts which include:

1) The action that a lever performs.

2) The power that is gained when a lever is used, the increase in mechanical force that a lever provides.

3) The process of using a small investment initially, which may be borrowed, in order to gain a much higher return on an investment. This may also be used to lower any loss liability.

In the financial world leverage is used to invest both large and small amounts of money, without being required to put up the capital to cover the investments. This is the practice of using capital which is borrowed to make the investment, in the expectation that the profits resulting from the investment are more than the interest due on the borrowed capital.

Many stock brokers use leverage on a frequent basis, and this can result in huge profits but can also cause huge losses. Smart brokers and traders never invest more than they can afford to lose, and many never borrow to make an investment, no matter how much of a sure thing the investment is supposed to be.

If you invest using leverage and your trading instincts are right you can walk away with a bigger possible profit. If your instincts or trading decisions are wrong not only will you lose the borrowed capital but you will also owe the total amount plus interest.

Bloggers discussing leverage can be found at sites like Reading the Markets and Capital 4 U.

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